For-Profits and the False Claims Act

Days after the Obama administration and several state attorneys general joined a False Claims Act lawsuit accusing Education Management Corp. of violating federal law governing incentive compensation for recruiters, a federal appeals court on Friday reinstated a similar lawsuit against another major for-profit institution, Corinthian Colleges Inc.

While the administration passed up an opportunity to join the Corinthian lawsuit in 2009, the ruling by the U.S. Court of Appeals for the Ninth Circuit creates another chance for the government to do so, and creates at least the possibility that the Obama administration will make such interventions a trend, using litigation as an additional tool in its attempt to rein in abuses in the for-profit sector.

False Claims Act lawsuits against major higher education companies are not a new phenomenon; the Apollo Group, the parent company of the University of Phoenix, settled such a suit for $78.5 million in 2009, and dozens of other suits have been filed (with most of them being dismissed) in recent years. But it is uncommon for the federal government to join such lawsuits, as it did this summer in the Education Management case; the Obama administration has opted out of cases as recently as this summer.

Under the False Claims Act, parties (known as relators) sue on behalf of the federal government, claiming that the defendants have defrauded the treasury of funds and hoping to be joined by the U.S. Justice Department. Whether the government joins the cases or not, the plaintiff shares in any financial penalties, which can include trebled damages. Cases in which the federal government chooses to intervene have a higher likelihood of success than do those in which it does not.

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